The Reserve Bank of India’s credit policy review, will be
the first after the new government has taken charge. It is also the second
bi-monthly policy for the current year (2014-15). The RBI has switched to
the system of reviewing credit policy once in two months from the earlier
once in 45 days or so following the recommendation recommendation of the
Urjit Patel committee.
Fortunately, very few expect the government to interfere,
certainly not so soon after taking office. Moreover, there has been a
positive message from the meeting RBI Governor Raghuram Rajan had with new
Finance Minister Arun Jaitley on May26. In this very first meeting with a
senior government official, Mr. Jaitley has listed out his priorities —
price stability, stimulate growth and fiscal consolidation — and said he is
keenly aware of the need to do a tough balancing act in reconciling the
several policy oblectives.
India’s inflation problems are structural in nature. The
RBI cannot influence supply-side factors, which are responsible for food
inflation. Supply side pressures on prices will be felt when investment
picks up consequent on the new government’s initiatives.
Balance sheet problems of public sector banks are another
reason standing in the way of lower interest rates. The combination of bad
and restructured loans means little room for banks to lower interest rates.
The policy document will stress the obvious point that
inflation is a problem for the government and the RBI.
Helped by healthy growth in electricity, fertilizers,
cement and coal, the output of eight core industries increased 4.2 per cent
in April, up from 2.5 per cent in the previous month.
The growth of the eight core sector in April, 2013, was
3.7 per cent.
Electricity production increased 11.2 per cent in April
this year from 3.5 per cent in the same month last year.
Similarly, fertilizers, cement and coal registered higher
growth during the month under review.
Fertilizers, cement and coal recorded a growth 11.1 per
cent, 6.7 per cent and 3.3 per cent, respectively, in April, according to
the data released by Commerce and Industry Ministry .
Coal, crude oil, natural gas, refinery products,
fertilizers, steel, cement and electricity sectors had expanded 2.7 per cent
in 2013-14. The eight industries have a combined weight of about 38 per cent
in the Index of Industrial Production. Steel production increased 3.1 per
cent compared with 10.1 per cent in the same month last year. Crude oil,
natural gas and petroleum refinery product sectors contracted 0.1 per cent,
7.7 per cent and 2.2 per cent, respectively, in April.
India’s trade deficit rose to a 10-month high of USD
11.23 billion in May even as exports grew by 12.4 per cent, highest rate in
six months, on improvement in the global demand.
Trade deficit, the difference between earnings from
exports and outflow on account of imports was USD 10.09 billion in the
previous month. It was however, lower than USD 19.37 billion in May 2013.
Helped by healthy growth in key sectors such as
engineering, petroleum products and garments, exports during the month
increased USD 28 billion from USD 24.9 billion in May 2013. However, imports
dipped by 11.4 per cent at USD 39.23 billion.
Gold imports in May dipped by 72 per cent to USD 2.19
billion, as against USD 7.7 billion in May 2013.
In the April-May period of this fiscal, exports grew by
8.87 per cent to USD 53.63 billion. Imports during the period dipped by
13.16 per cent to USD 74.95 billion, leaving a trade deficit of USD 21.3
Eighteen public sector banks, including SBI and PNB,
failed to fulfil the target for installing ATMs during 2013-14, leaving more
than over 9,300 branches without cash vending machines. As part of the
target, a total of 34,668 onsite ATMs were to be installed by PSU banks
during the last fiscal.
However, they could set up only 25,331 such machines by
March 2014, thus falling short by 9,337, as per Finance Ministry data.
Installation of Automatic Teller Machines (ATMs), especially by public
sector lenders, has been a major priority for the government’s efforts to
ensure financial inclusion.
Pursuant to Budget 2013-14 announcement, public sector
banks were required to ensure an onsite ATM in ever branch. As on March
2014, Allahabad Bank was yet to set up 1,950 ATMs, Central Bank of India
1,620, Syndicate Bank 1,085, Bank of India 7,44, State Bank of India (SBI)
696, Indian Overseas Bank 553 and Punjab National Bank (PNB) 499. On the
other hand, Bank of Baroda, Bank of Maharashtra, Canara Bank, IDBI Bank and
the four associates of SBI managed to meet the targets given to them.
There are roughly about 1.4 lakh ATMs of public and
private sector banks in the country. Financial inclusion aims to extend
financial services to the large hitherto un-served population of the
country. In addition, it strives towards a more inclusive growth by making
financing available to the poor in particular.
The Reserve Bank of India (RBI) Governor, Raghuram Rajan,
warned against excessive legal supervision on financial regulators as it
would hamper policy-making and increase systemic risks.
The broader point is that a lot of regulatory action
stems from the regulator exercising sound judgment based on years of
experience. In doing so, it fills in the gaps in laws, contracts, and even
regulations. Not everything the regulator does can be proven in a court of
law,” said Dr. Rajan while addressing State Bank of India Banking Conclave
Talking on the suggestions ade by the Financial Sector
Legislative Reforms Committee (FSLRC), Dr. Rajan said that the creation of a
Financial Sector Appellate Tribunal would hamper the policy decisions taken
by the regulator. He asked, “How much checking and balancing is enough? Do
we want even policy decisions to be appealable? Can legal oversight become
The FSLRC had recommended several measures to reform the
country’s financial sector. However, Dr. Rajan said that some of the
recommendations seemed somewhat “schizophrenic” while still others ‘faddish
and impressionistic” rather than based on deep analysis.
He warned that because of the tendency of any new
organisation to overreach to justify its existence, one should be careful
about tying the financial regulator with further judicial oversight.He also
criticised the suggestion to merge all regulation of trading under a new
Unified Financial Agency, so that the Forward Markets Commission, as well as
the bond regulation activities now undertaken by the RBI, would move under a
new roof, as would the Securities and Exchange Board of India (SEBI).